Tuition Deadline Agreement Did Not Create a Student Loan

Posted by NCBRC - February 18, 2019

An agreement establishing a tuition payment deadline was not a lending agreement and therefore, the debt created by the debtor’s failure to pay her summer tuition did not constitute a non-dischargeable student loan under section 523(a)(8). Hazelton v. UW-Stout, No. 18-159 (W.D. Wisc. Feb. 1, 2019).

In order to attend classes at UW-Stout, Kelly Hazelton signed an “Email Authorization/Payment Plan Agreement” which provided that she pay for summer classes in full by the end of the first week of class. Ms. Hazelton failed to pay for her 2015 summer classes but finished all the course work necessary to satisfy the requirements for her degree. She and her husband filed for chapter 7 bankruptcy and received a discharge, but despite knowing of the bankruptcy, UW-Stout refused to issue her degree. It also garnished her 2016 tax refund. The Hazeltons filed an adversary complaint seeking sanctions for violation of the discharge injunction, but the bankruptcy court found the debt was a student loan that was excepted from discharge under section 523(a)(8).

On appeal, the parties focused their arguments on whether the debt was a “qualified education loan” within the meaning of IRC section 221(c)(1), thereby rendering it nondischargeable under section 523(a)(8)(B). But the court never resolved that question, finding instead that the debt was not a loan at all. In so holding, the court relied on In re Chambers, 348 F.3d 650 (7th Cir. 2003), which found that nonpayment of tuition qualifies as a loan only where there is a separate agreement under which either, 1) funds have changed hands, or 2) there is an agreement under which the college extends credit. It is the “existence of the separate agreement acknowledging the transfer and delaying the obligation for repayment that distinguishes a loan from a mere unpaid debt.”

In this case, there was no such agreement. The Email Authorization/Payment Plan Agreement was not a payment plan, but merely a tuition deadline. There was no extension of credit by the college in exchange for deferred payment. Because the debt was discharged in the Hazeltons’ bankruptcy, the district court reversed and remanded for the bankruptcy court to determine appropriate sanctions.

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